Monday, May 24, 2010

A Death Blow to Europe's Welfare State?

Across Western Europe, the “lifestyle superpower,” the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II.

Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism.

Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella. They have also translated higher taxes into a cradle-to-grave safety net. “The Europe that protects” is a slogan of the European Union.

But all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead.

With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.

“We’re now in rescue mode,” said Carl Bildt, Sweden’s foreign minister. “But we need to transition to the reform mode very soon. The ‘reform deficit’ is the real problem,” he said, pointing to the need for structural change.

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

In Athens, Aris Iordanidis, 25, an economics graduate working in a bookstore, resents paying high taxes to finance Greece’s bloated state sector and its employees. “They sit there for years drinking coffee and chatting on the telephone and then retire at 50 with nice fat pensions,” he said. “As for us, the way things are going we’ll have to work until we’re 70.”

In Rome, Aldo Cimaglia is 52 and teaches photography, and he is deeply pessimistic about his pension. “It’s going to go belly-up because no one will be around to fill the pension coffers,” he said. “It’s not just me; this country has no future.”

Changes have now become urgent. Europe’s population is aging quickly as birthrates decline. Unemployment has risen as traditional industries have shifted to Asia. And the region lacks competitiveness in world markets.

According to the European Commission, by 2050 the percentage of Europeans older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to 1.

“The easy days are over for countries like Greece, Portugal and Spain, but for us, too,” said Laurent Cohen-Tanugi, a French lawyer who did a study of Europe in the global economy for the French government. “A lot of Europeans would not like the issue cast in these terms, but that is the storm we’re facing. We can no longer afford the old social model, and there is a real need for structural reform.”

In Paris, Malka Braniste, 88, lives on the pension of her deceased husband. “I’m worried for the next generations,” she said at lunch with her daughter-in-law, Dominique Alcan, 49. “People who don’t put money aside won’t get anything.”

Ms. Alcan expects to have to work longer as a traveling saleswoman. “But I’m afraid I’ll never reach the same level of comfort,” she said. “I won’t be able to do my job at 63; being a saleswoman requires a lot of energy.”

Gustave Brun d’Arre, 18, is still in high school. “The only thing we’re told is that we will have to pay for the others,” he said, sipping a beer at a cafe. The waiter interrupted, discussing plans to alter the French pension system. “It will be a mess,” the waiter said. “We’ll have to work harder and longer in our jobs.”

Figures show the severity of the problem. Gross public social expenditures in the European Union increased from 16 percent of gross domestic product in 1980 to 21 percent in 2005, compared with 15.9 percent in the United States. In France, the figure now is 31 percent, the highest in Europe, with state pensions making up more than 44 percent of the total and health care, 30 percent.

The challenge is particularly daunting in France, which has done less to reduce the state’s obligations than some of its neighbors. In Sweden and Switzerland, 7 of 10 people work past 50. In France, only half do. The legal retirement age in France is 60, while Germany recently raised it to 67 for those born after 1963.

With the retirement of the baby boomers, the number of pensioners will rise 47 percent in France between now and 2050, while the number under 60 will remain stagnant. The French call it “du baby boom au papy boom,” and the costs, if unchanged, are unsustainable. The French state pension system today is running a deficit of 11 billion euros, or about $13.8 billion; by 2050, it will be 103 billion euros, or $129.5 billion, about 2.6 percent of projected economic output.

President Nicolas Sarkozy has vowed to pass major pension reform this year. There have been two contentious overhauls, in 2003 and 2008; the government, afraid to lower pensions, wants to increase taxes on high salaries and increase the years of work.

But the unions are unhappy, and the Socialist Party opposes raising the retirement age. Polls show that while most French see a pension overhaul as necessary, up to 60 percent say working past 60 is not the answer.

Jean-François Copé, the parliamentary leader for Mr. Sarkozy’s center-right party, says that change is painful, but necessary. “The point is to preserve our model and keep it,” he said. “We need to get rid of bad habits. The Germans did it, and we can do the same.”

More broadly, many across Europe say the Continent will have to adapt to fiscal and demographic change, because social peace depends on it. “Europe won’t work without that,” said Joschka Fischer, the former German foreign minister, referring to the state’s protective role. “In Europe we have nationalism and racism in a politicized manner, and those parties would have exploited grievances if not for our welfare state,” he said. “It’s a matter of national security, of our democracy.”

France will ultimately have to follow Sweden and Germany in raising the pension age, he argues. “This will have to be harmonized, Europeanized, or it won’t work — you can’t have a pension at 67 here and 55 in Greece,” Mr. Fischer said.

The problems are even more acute in the “new democracies” of the euro zone — Greece, Portugal and Spain — that embraced European democratic ideals and that Europe embraced for political reasons in the postwar era, perhaps before their economies were ready. They have built lavish state systems on the back of the euro, but now must change.

Under threat of default, Greece has frozen pensions for three years and drafted a bill to raise the legal retirement age to 65. Greece froze public-sector pay and trimmed benefits for state employees, including a bonus two months of salary. Portugal has cut 5 percent from the salaries of senior public employees and politicians and increased taxes, while canceling big projects; Spain is cutting civil service salaries by 5 percent and freezing pay in 2011 while also chopping public projects.

But all three need to do more to bolster their competitiveness and growth, mostly by changing deeply inflexible employment rules, which can make it prohibitively expensive to hire or fire staff members, keeping unemployment high.

Jean-Claude Meunier is 68, a retired French Navy official and headhunter, who plays bridge to “train my memory and avoid Alzheimer’s.” His main worry is pension. “For years, our political leaders acted with very little courage,” he said. “Pensions represent the failure of the leaders and the failure of the system.”

In Athens, Mr. Iordanidis, the graduate who makes 800 euros a month in a bookstore, said he saw one possible upside. “It could be a chance to overhaul the whole rancid system,” he said, “and create a state that actually works.”

I have mixed feelings over the profound changes taking place in Europe right now. On the one hand, I knew that benefits were way too generous and it was only a matter of time before they'd be cut. On the other hand, I prefer European capitalism over American capitalism. Europeans work to live, not the other way around.

The way we're heading, we're all going to be asked to work till we die. Defined-benefit plans will become extinct for new members and older members risk seeing deep cuts in benefits. At the root of the problem, it's not just that promises were never able to be kept, it's also that wealth is increasingly being concentrated in the hands of few and the restless many are asked to shoulder the bulk of the fiscal holes despite being tapped out themselves.

Finally, Diane Urquhart sent me this message:

I am sending this email to you on behalf of Greg McAvoy, a Nortel LTD Employee from Calgary, Alberta.

CBC will be airing a series of news stories on Tuesday, May 25th about the dire consequences faced by employees whose companies self insure their disability and medical benefits, and then go bankrupt. There is breach of trust going on by employers and trustees failing in their fiduciary duties to protect their disabled employees as prescribed in the trustee agreements for Health and Welfare Trusts. The toxicself insured plans are completely unregulated and disabled employees are being forced into poverty because their long term disability benefits have not been funded. Several disabled Nortel employees from across the country in this situation are interviewed along with legal experts, the Council of Canadian Disabled and key political leaders.

It is estimated that more than 1.1 million Canadians have toxic long term disability benefit plans and they are being put at risk by the government’s failure to regulate them. One in ten Canadians in the workplace are exposed to toxic insurance, and it is not possible to detect if you are one of the unlucky ones.

The shows start in the morning on CBC Radio National News running every second hour. It will be on the local CBC Ottawa radio station on the half hour with a longer item at 7:15 AM. It will play across the country on CBC Radio The Current after the 9:00 AM News.

A CBC TV Story will air on the supper hour news across the country at 6:00 PM. These stories will also be available on the CBC websites.

This should serve as a stark reminder that Europe's woes are not just a European problem. They're a global problem, and the absence of leadership on the pensions issue will end up costing us all, especially the most vulnerable in our society.

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